FAQ #18

What is the impact of GST on takaful industry in terms of contribution rate?

Malaysian Takaful Association (MTA) had issued a press statement dated 20 March 2015 regarding the impact of Goods and Services Tax (GST) of 6% on general and family Takaful business in Malaysia effective 1 April 2015.  The statement can be summarized as follows:

1.     In general, contributions on general takaful are subjected to GST while family takaful is exempted.  In other words, all participants under general takaful will have to pay an additional 6% on their contribution due to GST.

2.     All fees and charges imposed on investment linked type of family takaful products such as certificate fee, fund management fee, switching fee, etc are subjected to GST.  This will resulted in slightly higher gross contribution due to those implications but the additional amount is less than 6% of the total contribution.

3.     Contributions on any riders such as critical illness, medical, personal accident, etc. attaching to family takaful products are subjected to GST even though the basic takaful product is not affected.  Those riders are usually categorized as general takaful products.

4.     Contributions for all family takaful coverage such as death and permanent total disability are exempted from GST.

FAQ #17

In the event that a car driver dies during an accident, will takaful operator settle the outstanding financing with the bank besides covering all the costs related to the damage to the vehicles involved?   

There are at least two different basic takaful coverages involved in the situation as mentioned in the question namely motor takaful coverage and credit term takaful.  The first takaful falls under general takaful while the second is under family takaful.  In Malaysia, motor takaful coverage is a compulsory requirement by law for all vehicles to be on the public road.  If the motor takaful coverage is a comprehensive type, takaful operator will bear all the costs involved due to the accident subject to the normal limitations and conditions of the certificate.  However, if the motor takaful is a non-comprehensive type which normally known as third party type, takaful operator will only bear the costs of losses and damages suffered by the third party only.

With respect to the credit term takaful, it is usually an option for the participant to incorporate with their financing.  Some financial institutions package it together with the financing facility while many don’t.  This credit term takaful normally covers death and permanent total disability due to any causes.  In the event of death or permanent total disability, takaful operator will settle all the outstanding financing balance with the bank.  This product is quite similar to mortgage reducing term takaful (MRTT) except that the tenure and amount of coverage are much lower.

Thus, if the credit term takaful is in-forced at the time of death due to the accident as mentioned in the question, the outstanding balance of the financing with the financial institution will be settled by the takaful operator accordingly, if the deceased is covered under credit term takaful.

FAQ #16

Why Takaful operator dictates the amount to be contributed into Takaful fund as it is based on tabarru’at or donation concept?

This question was posed to me during my session with about 40 lawyers from Malaysian Bar Council in April 2015.  It is a valid question and it proves that the person who posed the question does understand the concept of tabarru’at very well.  If you want to donate some money to a needy, you will decide how much to donate instead of being told by someone. 

Similarly, when we enter a mosque, we may contribute some money according to our own willingness into a donation box or sometimes known as “khairat” fund.  In the event that someone or a family in the same community encounter some difficulties such as death, accident, flood or fire, the trustees of the mosque will decide how much to donate to the family based on the available amount in the fund.  Or sometimes, the trustees may had predefined the amount of donation based on the event and usually the amount is just a token say RM1,000 or RM2,000 as a way to comfort the family during the hardship. The amount set is based on past experience of the mosque with high level of confident that the fund is more than sufficient to cater for such events in any particular period.

However, takaful business is a commercial entity owned by few shareholders who had invested their money, RM100 million, in the case of Malaysia, to finance all the operational activities of the business with an anticipation of a reasonable return.  Therefore, the management of takaful shall ensure with high level of confident that the takaful fund is always more than sufficient to cater for all the takaful needs i.e. to pay claims as well as meeting with all regulatory requirements such as solvency and reserving as prescribed by relevant laws. Besides that, the management shall also ensure that the business will generate reasonable expected return to the investors whether by way of investment activities or core operational activities i.e. underwriting of the business.  As a result, takaful operator will establish a prudent rating structures based on common critical factors mainly to ensure that the business is viable and sustainable for as long as needed to meet with all expectations of stakeholders.

Thus, even though tabarru’at is used in takaful business, the participants are bound to abide by certain rules including the amount of contribution to be made  due to the commercial objective of the entity.

FAQ #15

There are instances where Takaful operator will charge say RM2,000 for motor takaful coverage while a conventional insurance company may only charge RM1,000 for similar vehicle.  To the consumer, this is considered “zalim” or unfair as Takaful is charging much higher than the conventional insurer.  What is your comment?

Takaful company is operating as a commercial entity similar to any other business entities.   

 

Thus, Takaful is operating in a competitive business environment where all entities are striving to offer the best to their potential customers.  There are many strategies used by respective entity to attract their customers which sometimes misled the customers.  In insurance and takaful, the basis of deriving the contribution rate is almost similar for all companies.  Differences may arise when there are different benefits, exclusions, terms and conditions as well as services rendered.  In fact, there are many factors in determining the rate of a motor takaful or insurance.  Below are few of the key factors taken into consideration in determining the motor takaful rate:

1.     Type of vehicle

2.     Type of coverage required

3.     Area of coverage

4.     Sum covered

5.     Engine capacity

6.     No Claim Discount (NCD)

7.     Excess

8.     Any additional benefit required

a.     Windscreen cover

b.     Flood cover

c.     Car accessories cover

d.     Passenger liability cover

e.     Legal liability for passengers act of negligence

f.      Strike, Riot & civil commotion

Different company may impose different loading for each item which will lead to different final gross contribution or premium.  Consumer must understand the complete benefits offered by the company before accepting the quotation.  Thus, the comparison between takaful contribution and conventional insurance premium can only be dealt with provided that the full details ingredient  of the quotation available. There are instances where the provider allows to cover below market value of the vehicle.  Consequently the premium is lower but this practice may result in average clause penalty during claims where the claims payable is discounted based on the proportion between sum covered and the market value.

However, Takaful is operating in a different business model compared to conventional insurance company.  For a Muslim, he must ensure that he understands the business model very well to validate his transaction free from Gharar, Maisir and Riba.  The money he pays under Takaful is a contribution into a donation fund based on at-Tabarru’at and has no similarity whatsoever to the money paid under insurance contract known as premium.  Therefore, both contribution and premium are not comparable even though they are similar.  It is like giving to a needy voluntarily to buy a cloth and buying the cloth for yourself.  When you have agreed to voluntarily give some money to a needy to purchase a cloth you are in no circumstances will complaint whether the money you gave is high or not as you have fully agreed to donate the amount.  On the other hand, when you purchase the cloth for yourself, you definitely will explore the best possible offer available in the market.  In other words, you may consider your purchase as expensive or not after comparison with other sales.  As such, the money you voluntarily given to the needy is similar to takaful contribution where you willingly contribute to the takaful fund and the money you used to purchase the cloth is similar to the insurance premiums.  Now, you should be able to understand the key reason as why takaful contribution is not comparable to insurance premium.  Based on the same analogy, the money is called contribution in takaful instead of premiums as practised in insurance industry.